‘Execution risk’ a problem for AMP: Citi

Some of the assumptions in AMP's new strategy seem “too good to be true”, but plans to raise more revenue from advice and SMSFs are “sensible”, says Citi.

Citi's equities research team has released a new paper on AMP following the company's Investor Day last week, which laid out plans to focus on advice and SMSFs.

AMP is planning to respond to margin compression in the wealth management industry more broadly by "moving along the value chain", said the Citi report.

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Specifically, AMP has outlined its plan to take increased stakes in adviser practices and grow its SMSF business.

The increased revenue will be used by AMP to compete more aggressively in the platform and product space.

"AMP revealed the Australian wealth management revenue from a 1 per cent increase in assets under management (AUM) is equivalent to buying $30-50 million worth of advice businesses and that AMP currently churns through $80-100 million of businesses each year," the report said.

"This is also equivalent to a 1 per cent increase in AMP's SMSF administration market share."

But Citi said these numbers "almost sound too good to be true" – especially the claim that "if AMP simply retains the businesses it comes to own through buyer of last resort (BOLR) arrangements, it can get revenues equivalent to a 2 per cent increase in AUM on its platforms".

"There is also uncertainty on the impact ongoing industry changes such as robo-advice will have on margins, although AMP believes this will actually improve adviser efficiency," said Citi.

"AMP also argues it has now built up the infrastructure to centrally support advisers, driving efficiencies."

In addition, AMP has announced targets of $50 million earnings from its China joint ventures and a doubling of AMP Bank profits in five years.

Overall, AMP's strategy is "sensible", said Citi – but it comes with plenty of "execution risk".

"Even if the initiatives are successful they may take time to impact earnings. It is also uncertain what margins will ultimately be as the industry continues to undergo significant changes," said the report.

Citi retained its earnings forecasts along with a 'neutral' call and a target share price of $5.60.